Alongside other risk assets, metal commodities have likewise had a rough go of it in August.  As we noted in Friday’s Bespoke Report, the single worst performing asset month to date has been silver. As shown below, front month silver futures have quickly pulled back to the bottom of the uptrend channel that has been in place for the last year or so.

As for gold, this spring saw another unsuccessful retest of the 2020 highs, with a “triple top” now formed.

Turning to the industrial metal copper, once again, performance this month has been lackluster. This month’s drop in copper is putting to the test the uptrend off of the COVID Crash lows.

With weakness in both copper and precious metals, the relative strength line of copper versus gold has been fairly stable. As indicated by a falling and negative line in the chart below, copper has underperformed gold over the past five years, albeit more recently the line has not made any major shifts in trend.

The writing has been on the wall all year – Microsoft beat Google to the punch, and despite its past dominance, with the launch of ChatGPT in late 2022, Google was destined to take a backseat to Microsoft in the AI boom. The list of articles below is just a sampling of the ink and pixels that have been spent documenting the impeding collapse of Google and the rise of Microsoft in online search and business productivity tools:

“Thanks to OpenAI, Microsoft is beating Google in the artificial intelligence game” – Vox, 1/26/23
“Microsoft packs Bing search engine, Edge browser with AI in big Challenge to Google” – Reuters, 2/7/23
“Thanks to ChatGPT, Microsoft can finally beat Google” – Business Insider, 2/7/23
“‘AI First’ To Last: How Google Fell Behind In The AI Boom” – Forbes, 2/8/23
“Investors’ query: Can Google answer Microsoft’s AI threat” – AP News, 2/8/23
“How Google Ran Out of Ideas” – The Atlantic, 2/16/23
“How Google Became Cautious of AI and Gave Microsoft an Opening” – Wall Street Journal, 3/7/23
“Google Devising Radical Search Changes to Beat Back A.I. Rivals” – New York Times, 4/16/23
“Google Lost $57 Billion in One Day, Because Microsoft is Leading the AI Race” – Robb Report, 4/18/23
“Microsoft ‘holding a lot of the cards’ in AI-powered search war with Google” – Yahoo Finance, 4/26/23

For much of the first half of 2023, shares of Microsoft (MSFT) outperformed the overall market and Google parent Alphabet (GOOGL) based on the sentiment of the articles above and ones like them. Back in early February, when Alphabet rushed its AI answer to Microsoft’s Bing powered by ChatGPT, the company lost more than $100 billion in market value in a single day after Bard gave a factually incorrect answer during its introduction to the world.  It looked like a major PR disaster for Alphabet management, but Bard’s error shed light on a a key aspect of AI chat bots in general, namely that they all have a tendency to give wrong answers.  Even when it comes to queries involving seemingly straightforward arithmetic, ChatGPT often gets the answer wrong. 

Just as ChatGPT increasingly gives wrong information, the obituaries for Google also turned out to be wrong, as last week, shares of GOOGL surpassed MSFT in terms of performance since the launch of ChatGPT.  Through late morning on Monday (8/14), GOOGL was up just under 30% (29.6%) compared to MSFT’s gain of 26.4%.  Maybe it’s just a coincidence, but we found it interesting that the most recent peak in MSFT’s stock came within days of the headline below.

“ChatGPT users fall for first time, spurring questions about AI boom” – Washington Post, 7/7/23

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

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On This Day in History:
Berlin’s Border.  On August 13, 1961, East Berlin closed the border with West Berlin before constructing the wall that divided the two until late 1989. The wall, cutting through the heart of the city, was a significant symbol of the Cold War division between Western capitalist democracies and Eastern communist regimes. The iconic structure encapsulated the clash of ideologies, the human cost of political repression, and the eventual triumph of freedom and democracy.

Economic Trends and Policy

Tax Data Reveals Large Flight of High Earners from Major Cities During the Pandemic (Economic Innovation Group)
The significant decline in taxable income in urban counties during the pandemic, together with net migration out of those counties, signals a pattern shift that higher-earning migrants are increasingly attracted to growing rural regions. The trend could have lasting impacts on markets and services of local governments. [Link]

Why Americans plan to take Social Security earlier, and even leave retirement money behind (USA Today)
While tapping into Social Security later provides much higher benefits, American’s are taking Social Security early on concerns that the program could run out of money by 2033. American’s also fear they will need the money. This means many will have to work for additional income on their own to live comfortably in their later years. [Link]

First American City to Tame Inflation Owes Its Success to Affordable Housing (Bloomberg)
Minneapolis emerged as the initial major US city to curb annual inflation beneath the Fed’s 2% target in May. Minneapolis, before the Covid-era supply chain issues and labor shortages, decided to address the housing issue that impacts one third of CPI by investing in and building apartments and condos in the area. Skeptics thought it would gentrify the area and lead to sky-high rents, but quite the opposite has happened. [Link]

Most stocks are bad for your wealth (Financial Times)
Arizona State professor Hendrik Bessembinder’s research reveals that a significant proportion of US and global stocks have underperformed compared to local currency cash returns over the long term. His recent paper indicates that 58.6% of US stocks since 1926 reduced shareholder wealth, while around half of markets saw more than half of stocks losing money on a buy-and-hold-with-dividends-reinvested basis. This challenges the common belief that stocks consistently outperform cash in the long run and highlights the impact of a few high-performing stocks on aggregate market performance. [Link]

Biden calls China a ‘ticking time bomb’ due to economic troubles (Reuters)
Falling into deflation, China contrasts much of the world combatting high inflation. President Biden is worried about their struggles, suggesting that “when bad folks have problems, they do bad things.” The Chinese government believes relations to the US are at the lowest point since formal foreign relations were established back in 1979.  Biden’s new executive order to prohibit investment in China after calling President Xi Jinping a dictator is also certainly not helping that sentiment. [Link]

Natural Science

Record hot ocean temps could turbocharge the hurricane season, says NOAA (CNBC)
Scientists increased the chance that this year will be an above-normal Atlantic hurricane season to 60% on Thursday. The revised forecast anticipates 14 to 21 named storms, of which six to eleven could become hurricanes and two to five major hurricanes. The combination of warm sea surface temperatures and a potential late blooming El Niño pattern have contributed to the uncertainty for the remainder of the season. [Link]

Scientists at Fermilab close in on fifth force of nature (BBC News)
Scientists at Fermilab near Chicago have reported further evidence that sub-atomic particles called muons are behaving in a way that contradicts the current theory of sub-atomic physics. These muons are similar to electrons but are about 200 times as massive and wobbled much faster than expected in this experiment. While more data is needed to confirm the results, if verified, this could indicate a significant revolution in physics, challenging the existing Standard Model. [Link]

Business Success

3 friends pooled $3,000 to sell T-shirts—they’ve brought in over $250 million since 2019 (CNBC)
True Classic launched in 2019 on a very small investment of $3,000 and earnings over $26,000 in just the first month. But, in 2021, founders overestimated demand and ordered excessive inventory, almost causing the company’s collapse. They struggled for two years, reducing profit margins, paying vendors extra interest, and seeking financing.  True Classic has now recovered, emphasizing careful planning and methodical decision-making to avoid past mistakes and compete with industry giants. [Link]

California just opened the floodgates for self-driving cars (Washington Post)
California regulators have granted self-driving car companies Waymo and Cruise permission to offer 24/7 paid taxi services in San Francisco, removing most restrictions on operating and charging for rides. The decision marks a significant step in the autonomous transportation industry, providing a larger platform for testing the viability of driverless vehicles. Despite concerns and pushback from local leaders, the vote signals a shift toward more autonomous mobility services and poses questions about the impact on jobs, safety, and society at large. [Link]

Social and Health Trends

Women’s Problem Drinking Is Catching Up to Men’s (WSJ)
Women’s drinking has been on rise for the last twenty years as alcohol-related emergency department visits, hospitalizations, and deaths increase faster for women than for men. The rise in women’s drinking has been especially notable among those in their 30s and 40s, and the trend accelerated during the pandemic due to increased stress. Additionally, binge drinking among college women has gradually become more socially accepted over generations according to doctors. The growing issue has different impacts for women than it does for men, and one’s that often go unnoticed by medical professionals. [Link]

Covid Revenues Are Caving. New Boosters May Not Help. (Barron’s)
Earlier this year, Pfizer (PFE) and Moderna (MRNA) both estimated that 100 million COVID-19 vaccine doses would be administered in the US during 2023, but nearly eight months into the year, only 12 million doses have been taken so far. [link]

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Have a great weekend!

The S&P 500’s selloff over the last week heading into today’s CPI print caused bullish sentiment to dip a little.  Compared to last week when 49% of respondents to the weekly AAII survey reported as bullish, this week only 44.7% reported as such. That is the weakest reading on optimism in a month, but remains well above the range of readings of most of the past year and a half.

The drop in bullishness was met with an increase in bearishness.  Bearish sentiment rose back above 25% for the first time since the week of July 14th.

In turn, the bull-bear spread moved lower this week, crossing back below 20 to 19.2. That is the lowest reading in four weeks as the spread continues to point toward an overall bullish tilt to investor sentiment.

In fact, this week marked the tenth in a row that bullish sentiment sat above its historical average while simultaneously bearish sentiment was below its historical average.  Looking across the past twenty years, there are not many examples of this sort of extended bullish sentiment streaks. In fact, only three other periods saw streaks of similar length. The most recent ended in May 2021 at 13 weeks. Before that, there was an identically long streak in the first quarter of 2012 and prior to that, you’d have to go all the way back to 2004 to find an example. In the 1990s through late 2000, such streaks were much more common.

Initial Jobless Claims have been back on the rise for the last two weeks with this week’s reading coming in at 248k versus estimates for 230k.  That is the most elevated reading since the first week of July and marks the largest week-over-week rise since the first week of June.

Before seasonal adjustment, claims totaled 225.6K, up roughly 20K from the previous week.  At those levels, claims are above those of the comparable week of last year and multiple pre-pandemic years. The past couple of weeks have seen particularly pronounced seasonal tailwinds which have historically ebbed this week and will again likely happen next week. However, those tailwinds are set to continue later this month into September when claims have typically reached an annual low point.

Lagged one week to initial claims, continuing claims came in lower than expected, dropping to 1.684 million from 1.7 million. That is slightly above the low from two weeks ago but does not yet disrupt the trend downward in continuing claims.

As for a state level breakdown of claims, in the heatmap below we show where continuing claims are most and least elevated as a share of the each state’s respective labor force.  As shown, the West Coast and Northeast are the two weakest regions of the country with the highest percentage of continuing claims.  Some states in the Southwest like Texas and New Mexico and the Midwest like Illinois and Minnesota also have pockets of weakness. Given various states have different unemployment insurance program eligibility requirements, benefit amounts, and program lengths, that is not necessarily to say these are the areas with the highest unemployment rates, but rather these are the places contributing the most to national claims counts.